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VIX versus the Green Shoots


Volatility is getting crushed no matter where you look.

That volatility smack you're feeling? Doesn't bode so well, said Dr. Brett yesterday.

Going back to 2000, we've had 130 such instances of 20-day highs in stocks and 20-day lows in volatility. Five days later, SPY averaged a loss of -.32% (52 up, 78 down).

By comparison, for the remainder of the sample, SPY averaged a loss of -.03% (1158 up, 1065 down).

I also saw that, as we made the 20-day high in SPY, my demand measure of upside momentum (an index of the number of NYSE, NASDAQ, and ASE issues closing above the volatility envelopes surrounding their moving averages) was lower than my Supply measure (stocks closing below their volatility envelopes).

Since September 2002, when I began assembling those data, that's occurred 61 times. Five days later, SPY was down by an average -.45% (24 up, 37 down). By comparison, for the rest of the sample, SPY was up by an average .07% (904 up, 760 down).

Make no mistake about it, volatility is getting crushed no matter where you look. Even worse, if you check individual names. Normalized 30-day volatility in Apple (AAPL) went below 28 versus a previous 2-year low near 33. Similar in Google (GOOG) (2-year graph shown above) .

And it isn't just tech giants. Pick an industry. Exxon (XOM)? Goldman Sachs (GS) -- 52-week volatility lows. Even Potash (POT) with all the actual stock volatility lately sees options near the yearly bottom.

It's a bit of deja vu to the summers of 2000 and 2001 when the worst was over, too. In hindsight, it wasn't. Of course it's also similar to 2003 when the worst in fact was over, so nothing so predictive longer term here. But I think that's the whole point. Don't be fooled by quotes like this.

If the VIX continues to fall, it may signal a sustained move higher for stocks, analysts say.
No, it doesn't. It signals utter complacency. But again, doesn't mean we're declining and options are exploding tomorrow.

A commenter had a good point yesterday: While cheap options volatility may not prove a good buy all that fast, it does provide an excellent way to hedge. Like a winning stock long. Really tough to argue against converting it to a cheapo call long and limiting the downside you can give back to the value of the call, while still playing on the up side.
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No positions in stocks mentioned.
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